Copper Prices Fare Better Than Oil, Other Assets

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Copper, known as a leading indicator of economic activity, has suffered along with many other commodities on the heels of the spread of the coronavirus. Futures prices were trading well below a January peak but faring better than other markets, like oil.

The moves for copper are particularly important for those who look to the metal for hints on where the economy and stock market are headed.

Copper is called “Dr. Copper…because it carries a Ph.D in Economics,” says John Caruso, senior asset manager at RJO Futures.

It “tends to front run the direction of equity markets and is usually a good indicator of the health of the business cycle,” he said. So far it has “held up much better than other economic-sensitive markets.”

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The S&P GSCI Copper index fell by 1.3% over the first seven trading days in March, compared with a decline of 11.4% for the S&P GSCI, a broad-based commodities and energy-heavy index, according to Fiona Boal, head of commodities and real assets at S&P Dow Jones Indices.

Boal points out that “copper was one of the first market casualties of the COVID-19 outbreak, given that demand for the metal is strongly linked to the Chinese manufacturing sector,” with the S&P GSCI Copper index down more than 11% from its most recent high in January.

“If COVID-19 is responsible for a short and sharp hit to global economic activity and not a protected global economic slowdown…then the negative blow to copper demand is likely to be relatively short-lived,” says Boal.

Copper prices on the London Metal Exchange and Comex touched their lowest levels in roughly three years, with LME data showing cash copper at $5,482 per metric tonne on March 9 and Comex futures prices settling at $2.4725 a pound on March 12.

Still, the year-to-date drop of nearly 12% for copper futures compares with a Dow Industrials decline of over 26%.

“The bet is that China will prop up its economy and copper will benefit,” says Marnie Owen, global head of technical analysis at Informa Global Markets, adding that China announced stimulus measures last month that supported the metal and central banks such as the U.S. Federal Reserve cut interest rates to help counter COVID-19 risks to the economy.

China, meanwhile, has been recovering. “Within China, there is a cautious desire to get back to business as usual, but the bigger question would be whether demand for Chinese exports from other countries can keep up to pace, as it’s their turn now to scramble to cope with the outbreak,” says Keith Tan, senior managing director of steel and scrap at S&P Global Platts.

New cases in China have slowed, but climbed in other parts of the world. On March 12, China reported 26 new confirmed cases, while Italy’s was at 2,313.

Ed Egilinsky, managing director and head of alternative investments at Direxion, says copper demand and prices could continue to decrease overall in the short term if the coronavirus spread worsens in North America and Europe.

If there’s a lasting impact beyond the second quarter, copper could drop to the $2.20 range, he says. That would be the lowest since October 2016.

For now, Caruso believes there is “no fundamental or technical indicator suggesting we should be buying and holding copper,” and there’s no indication that the market has seen the lows for copper.

At the same time, Caruso is “hesitantly bearish” as a rise in global monetary and fiscal stimulus may contribute to a “re-acceleration of inflationary pressures later this year, and that could reignite the prices of hard assets.”

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